“Pointing to a map of ACORN’s research showing the hardest hit areas in San Francisco – Ocean View, Bayview, Visitacion Valley, Excelsior – Quezada said she believed lenders and mortgage brokers targeted the area’s most vulnerable borrowers.”
∙ 4,800 subprime Bay Area loans at risk of foreclosure by 2008 [SFGate]

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It’s just stupid to point at the areas with the highest rate of foreclosure and and complain that lenders “targeted” them for subprime loans. Of *course* they did. The entire reason that subprime loans exist is to provide loans that have a higher risk of loss or default. That’s why they’re not “prime” and that’s why they have higher rates. The problem isn’t that subprimes have higher rates of default than prime loans. They were supposed to. The problem is that they have higher rates even than the lenders had thought. Which means it’s the lenders getting screwed over.
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You’re right, it is getting pretty exciting to see how ugly things are getting.
In the eyes of a banker, there’s not much remedy for stupid consumers. Maybe some of these people should have actually read the terms of the promissory notes they were signing, and/or perhaps do some 2-5 year cash flow budgeting. Or not, and then just self-combust and lay blame on the lender. Kind of like smokers who continue to sue Philip Morris.
I doubt we see any creep into the quality areas of the City…it takes a pretty desparate and uninformed person to sign up for a subprime loan.

The question is, when do we see the effects creep into areas that aren’t supposed to be high risk and then what happens next?
Watch the pay option loans. Those were considered prime and their default rates are shooting up. An overwhelming majority are getting paid using the minimum payment, which means negative amortization of those loans.
There is a cap on the amount that is allowed to go Neg Am before the payments reset to the actual payment to pay off the interest and principal. When the cap gets hit, watch out. And these are prime loans. Not for desperate and uninformed.

What I don’t get is WHY people would make so many loans to sub prime people in the first place and NOT expect a good portion of them to somehow default.
I mean, isn’t the definition of a subprime loan risk um, SUB PRIME? In that either a person doesn’t have the income necessary to sustain the loan over the agreed to period, or perhaps has other issues that keeps them from getting a plain old loan?
Put another way – if I loan my friend who has a job, etc. $1000 and who is a responsible member of The Community, and I know he’s honest and whatnot, I can expect to get my $1000 back.
If I loan some stranger who’s a drifter or just kind of a flake, is it likely I’m getting my $1000? No. So why would a company loaning millions of $$$$ do the latter?
Esp. given that wages are stagnating for many people, and aren’t keeping up. People are using credit cards to maintain a lifestyle they simply can’t afford. And then thigns start to go bad. This is a surprise?

Why make a subprime loan? Partly if the house goes up in value fast enough, even if he can’t make the payments, the borrower can just sell the house for more than he paid and pay off the loan. And partly because if the mortgage broker can find a bigger sucker to buy the loan from him and pocket his commission in the process, what does he care if it defaults?

Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of “regulatory foot-dragging” that has harmed the public.

Schlesinger maintains the Fed’s prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was “here is the line between right and wrong, don’t cross it,” to a current underlying policy that “anything and everything that might be called financial innovation ought to be embraced.”
“This is a very faulty premise that deserves debate and reflection and ultimately, in my opinion, a changed perspective,” Schlesinger said in an interview with MarketWatch.

He points specifically to the opposition to government regulation that flourished at the U.S. central bank under former Fed chief Alan Greenspan and has continued unabated under his successor Ben Bernanke.

At the time Bernanke was preparing to succeed Greenspan, Schlesinger predicted his biggest challenge would be the aftermath of Greenspan’s laissez-faire approach to regulation.
Willing to go only so far
The current credit crisis began early in 2007 with rising delinquencies in the subprime mortgage sector. Like a slow fuse, these difficulties spread throughout the global financial system as investors realized that these bad mortgages had been securitized, pooled together and sold to financial institutions around the world.
By early August, parts of the financial system were close to frozen and central banks were forced to inject billions of dollars to add liquidity to maintain the workings of the credit markets.
Over the last two months, some markets have recovered, but problem areas remain, particularly in the London market for structured investment vehicles, or SIVs. There is concern in financial markets about bank exposure to these investment pools and concern that possible forced sales of their assets might shock already jittery credit markets.

Separately, Bank of America, JPMorgan and Citigroup are leading a plan to raise $80 to $100 billion to help buy some of the assets held by SIVs facing collapse.

But these same international bankers spent last weekend in the corridors of the International Monetary Fund’s annual meeting urging government officials not to rush to adopt new rules to get the financial market turmoil under control.

Schlesinger calls this reaction by bankers “misguided, predictable and familiar.”
“It is sort of stunning that as the biggest banks prepare to conduct a bailout of unprecedented scope, they are at the same time warning for excessive caution on the regulatory side, which is exactly the type of approach that might have spared some of them the consequence of their own worst excesses,” he said…

In addition, the Fed also could have dampened the Wild West market conditions for subprime mortgages that resulted in so many poor loans due to fraud, says Schlesinger.

In an interview on the CBS News’ program “60 Minutes,” Greenspan said the Fed couldn’t stop subprime mortgage originators.

Schlesinger disagrees. Although the abuses came from independent originators and not banks, Schlesinger said the Fed had “all or most” of the authority it needed to police the market under two laws passed by Congress.

“The Fed’s unwillingness to flex the muscle that those statues granted is a real black mark on the central bank,” he said.

Subprime has historically had default rates only slightly less than other loan categories. When it was introduced the criteria required for a loan like that were quite rigorous. Way back then appraisals were taken more seriously, and banks had strict lending standards. A whole range of safeguards had to be abandoned in order to reach this point, and the subprime market will probably still do fine because they are some of the only new customers that banks have seen for a while.